Dow Chemical & Owens Corning….hmmmm

ToddSullivan
June 20th, 2008

Recent news got me to thinking….

First this:
“Dow Building Solutions (DBS), a market-facing business unit of The Dow Chemical Company (DOW), announced that it has signed an agreement to acquire Stevens® Roofing Systems and Geomembrane Systems, a business of JPS Industries, Inc. Based in Holyoke, Mass., Stevens® Roofing Systems manufactures reinforced thermoplastic (TPO) commercial roofing systems, an area with significant growth potential that aligns well with Dow’s energy efficient building expertise. Pending the transaction close, Dow plans to operate the acquired business as Dow Roofing Systems LLC. Financial terms were not disclosed. Regulatory approval is not required, and the transaction is expected to close within 30 days.

Dow Building Solutions’ participation in the commercial construction market centers around creating energy efficient structures, including insulation, weatherization systems and exterior wall systems. Stevens® is an innovator and a recognized leader in TPO single-ply roofing systems for commercial and industrial applications. The planned acquisition adds Stevens®’ commercial roofing expertise to Dow’s building science know-how, insulation and polymer technology expertise to deliver comprehensive solutions in this rapidly-growing industry segment.”

Then this news:
Special-Situations Hedge Fund Harbinger Capital Partners has taken a stake in Owens Corning (OC). Since late April, Harbinger has spent $57.46 million purchasing 2.6 million (almost 2%) shares of Owens Corning on the open market at prices ranging from $20.56 to $23.96 each.

Harbinger may be think that like Sherwin Williams (SWH), Owens Corning (OC) is very cheap based on its long term earning potential, its market share and brand recognition.

In my recent conversation with Dow CEO Andrew Liveris we spoke about Dow’s M&A prospects.

While the large “transformational deal” ($10 billion plus) most want is unlikely (and unwanted from this author’s perspective) Liveris did say the scores of smaller deals were likely. Owens, with a market cap of $3 billion would fit into that frame. With $9.5 billion coming in Q4 and the roughly $3 billion already in the bank. The deal is easily doable.

Now, OC has put it asbestos litigation behind it and has successfully transformed it earnings profile to 60% international with it composites purchase recently. Both the composite, fiberglass insulation and roofing businesses do have some symbiosis with Dow businesses so cost savings would be available. It would also immediately vault Dow Building Solutions into a market leader.

The best part? The price. Like everything that has anything to do with housing or any kind, Owens share price has been hit, down 30% over the past year. Andrew Liveris, is, a value investor. He is also the best kind, a patient one. Owens right now represents value and more earnings diversification for the company. It also, now, finally, represents and international presence.

By the end of the year about 1/3 of Dow’s market cap will be cash. Expect buybacks and dividend increases and small purchases. Owens is larger than “small” but still could easily work.

Just a thought…….

Disclosure (“none” means no position):